Mtg. Int. Tax Deduction on a Contract for Deed for buyer?

[Chris Johanski]

state of Minnesota, can a buyer on a CD claim the Mtg.Int. Tax deduction if he/she is making the mtg. payment or enough of a payment to cover the mtg? Also, what if the house has no mtg. on it with the original owner, can the buyer on a CD claim the Mtg. Int. Tax Deduction?
Thank you.
Chris

[Dave Toelkes]

Let's keep it simple. A seller has sold his property to a buyer on contract for deed. The contract has a market interest rate. A contract for deed is an installment sale. The seller will report a portion of the buyer's payments as a return of basis, a portion as taxable profit (capital gain), and a portion as interest income.

If the seller owned the property free and clear. Then the interest received from the buyer is ordinary income. The seller must give the buyer a 1098 or equivalent every year so the buyer can take the home mortgage interest deduction.

If the seller has an underlying mortgage, then the buyer still gets a 1098 for the full amount of interest the buyer paid during the year. The seller reports the interest received from the buyer as income and offsets it with the mortgage interest he paid on the underlying loan. Effectively, the seller is taxed on the interest spread.

In both scenarios above, the seller will also pay capital gains tax on the portion of the buyer's payments that represent profit on the sale of the property. The portion of the buyer's payments that is a return of basis is not taxed.

If the property was an investment property with unrecaptured depreciation, then the unrecaptured depreciation is taxed in full in the year of the sale.